Fra ABN Amro:
How will the ECB’s rate guidance change?
ECB View: Rate guidance to be specific on time horizon – Executive Board member Peter Praet commented on monetary policy today. The institution’s dovish Chief Economist was unmoved by the recent spike in market volatility saying he saw no consequences ‘so far’.
However, he also played down the recent IG Metal pay settlement, saying that it was ‘fully in line with our baseline scenario for inflation’, something also confirmed by the hawkish Bundesbank President Jens Weidmann. That remark is important given that the ECB sees subdued wage growth and core inflation in the eurozone this year and next. Perhaps his most interesting comments were on the Governing Council’s forward guidance.
He confirmed the central bank’s guidance on sequencing (that interest rates would remain on hold until ‘well past’ the end of QE) saying that ‘the sequencing is an essential part of our forward guidance that anchors interest rate expectations’. Furthermore, he said as the end date for QE gets closer, the Governing Council will need ‘to be more specific about what do you mean by ‘well past’ on interest rates’.
We think the ECB will be clarify the time horizon it intends in its forward guidance on interest rates, by saying on current information interest are likely to remain on hold until a specified point in the future. In particular, the ECB could state that it expects ‘interest rates to remain at their present levels until at least mid-2019’. Our current base case is that the ECB will raise interest rates in the second half of next year, with September the month pencilled in. (Nick Kounis)
